FuelCell Energy, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended July 31, 2011; comparisons are with the corresponding 2010 periods. Dollar amounts are in millions unless noted. The company develops, manufactures and services stationary fuel-cell power plants and continues to report operating cash outflows.
Financial performance and liquidity
| Metric | Three months ended July 31, 2011 | Nine months ended July 31, 2011 | Prior comparable period |
|---|---|---|---|
| Total revenue | $31.2; up 65% | $87.8; up 75% | $18.9 and $50.1, respectively |
| Product sales and revenue | $29.4; up 81% | $81.8; up 95% | $16.2 and $42.0, respectively |
| Research and development contract revenue | $1.8 | $6.0 | $2.7 and $8.0, respectively |
| Operating loss | $(7.4) | $(37.8) | $(12.6) and $(42.3), respectively |
| Net loss | $(7.8) | $(38.8) | $(13.1) and $(43.8), respectively |
| Net loss attributable to common shareholders | $(8.6), or $(0.07) per share | $(50.0), or $(0.41) per share | $(13.8), or $(0.15), and $(45.9), or $(0.52), respectively |
| Cash used in operating activities | Not presented for the quarter | $(18.0) | $(23.1) for nine months |
- Third-quarter gross margin was $0.1 million overall: product gross margin was $0.2 million, while R&D contract gross margin was $(0.1) million. The product cost-to-revenue ratio improved to 0.99 from 1.24.
- Nine-month gross margin was $(13.0) million, including an $8.8 million B1200 repair and upgrade charge. Excluding that charge, management reported non-GAAP gross margin of $(4.3) million and product cost-to-revenue ratio of 1.05, versus 1.36 in 2010.
- Cash and cash equivalents were $31.5 million at July 31, 2011, with $18.0 million in U.S. Treasury securities, for total cash and investments of $49.5 million. Total cash and investments were $54.6 million at October 31, 2010.
- Current assets were $112.0 million and current liabilities $89.5 million, a current ratio of approximately 1.25. Total liabilities were $114.4 million. Shareholders’ deficit was $16.5 million; total deficit equity was $17.4 million.
- Debt and other liabilities on the balance sheet totaled $7.8 million, including $2.6 million drawn on a $5.0 million revolving facility. Separately, the Series 1 preferred obligation was $20.5 million, of which $7.0 million was current. Series B preferred stock remained outstanding with a $64.0 million liquidation preference.
- Cash from financing activities was $14.8 million for the nine months, including common-stock offering proceeds and $2.6 million of net revolver borrowings. The company also paid $9.994 million in preferred dividends and returns of capital. Common shares outstanding rose to 127.1 million from 113.0 million at October 31, 2010.
Changes, business developments and outlook
- Revenue growth and narrower operating losses reflected higher product sales and improved product margins, alongside lower administrative and R&D expenses. R&D revenue declined as DOE solid-oxide fuel-cell work shifted between program phases.
- POSCO Power accounted for 34% of third-quarter revenue and 49% of nine-month revenue. Four named customers together represented 81% of third-quarter revenue and 76% of nine-month revenue, underscoring customer concentration.
- In May 2011, FuelCell Energy announced a $129 million, 70 MW order for fuel-cell kits and related equipment and services for POSCO Power. Deliveries were scheduled to begin in October 2011 and continue monthly through October 2013. Management expected approximately 40% of contract value to be received by October 2011.
- Total product and service backlog was $230.6 million at July 31, 2011, including $152.9 million product backlog and $77.7 million long-term service backlog. Product backlog was 78.5 MW. A 1.4 MW, $5.4 million contract was removed from backlog because the customer had not met certain contractual requirements.
- Management stated that profitability would require higher order volumes and cost reductions, estimating company profitability at an annual production rate of 80–90 MW, depending on sales mix. Production run rate had recently increased to 56 MW annually; current capacity was up to 90 MW. Planned expansion to approximately 150 MW could require $30–40 million in additional capital, potentially in stages. The company anticipated $4–6 million for production-asset upgrades and maintenance.
- Management expected existing capital resources, anticipated revenue and cash flows to meet requirements for at least the next 12 months, but noted future liquidity depends on order growth, cost reductions and possible access to additional debt or equity financing. Operations were not generating positive cash flow.
Unusual items, risks and contingencies
- The B1200 repair and upgrade program covers selected 1.2 MW modules made between 2007 and early 2009. The company recorded an approximately $8.8 million charge in the second quarter; the program began in the third quarter and was expected to conclude by mid-2012. The related reserve was approximately $10.6 million at July 31.
- A March 2011 modification of the subsidiary Series 1 preferred-share agreement reclassified the instrument as a liability and generated an $9.0 million charge in calculating loss attributable to common shareholders. The obligation carries scheduled payments, including deferred amounts due through 2011, and ongoing payments through 2020; the company guarantees the subsidiary’s principal and dividend obligations.
- Despite improvement, nine-month results remained loss-making. Management’s adjusted loss to common shareholders was $32.3 million, or $0.26 per share, excluding the B1200 charge and preferred-share modification charge; this is a non-GAAP measure.
- Long-term service agreements carry potential stack replacement, maintenance and performance obligations. Estimates depend on stack life, service requirements and future costs; older three-year stack replacements were expected to continue into mid-2012. The company reported $9.9 million in long-term stack residual-value assets.
- Approximately $9.7 million of cash and cash equivalents was pledged as collateral or for letters of credit; outstanding letters of credit totaled $8.7 million. Purchase commitments were $45.9 million, including $41.3 million due within one year.
- Management identified concentrated customer exposure, possible contract cancellations or renegotiations, reliance on order growth and financing, product performance and service costs, and uncertain government R&D funding as risks. Ordinary-course legal proceedings were not expected by management to have a material adverse effect. No material risk-factor changes from the prior Form 10-K were reported.
Important facts for investors to verify
- Whether the POSCO order converts to scheduled deliveries and cash receipts, and whether production capacity and customer demand support the stated profitability threshold.
- Whether product margins improve sustainably after separating recurring economics from the B1200 program charge and other service, warranty and installation costs.
- Cash burn, available liquidity and financing needs, including the effect of pledged cash, preferred-share payments, purchase commitments and any further share issuance.
- Customer concentration and the status of the removed $5.4 million backlog contract, along with the funding and conversion of the $13.6 million R&D backlog, of which $2.1 million was funded.
- Actual costs and completion timing for the B1200 repairs, and changes in long-term service reserves and stack residual-value assumptions.